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Summary

NVIDIA is a relatively young software company that produces digital media processors for a
variety of computing platforms. When we take a look at NVIDIA’s one-year price performance,
we can see that they have done far better than others in the industry, particularly in their positive
earnings record in recent quarters. Their hearty performance in emerging industries is not
restricted to bitcoin, as they are also making strides in Artificial Intelligence (AI), driverless car
technologies, deep learning and more. Such positive performance in various industries suggests
that their dependence on the declining PC industry will wane, which bolsters our optimism about
their potential growth moving forward. Other positives include NVIDIA’s contemporary product
lineup including very strong gaming devices and premium notebook GPUs. The heightened
concentration on GRID platforms will inevitably increase the adoption of GPUs in data centers,
which in turn gives NVIDIA a strong advantage in the market.

Overview

Based out of Santa Clara, California, the NVIDIA Corporation primarily provides media
processors and similar software’s for a variety of visual computing platforms. NVIDIA is not only
a global leader in the production of visual computing technologies, but it is actually the creator of
the GPU (graphic processing unit) which generates realistic and interactive graphics on
personal computers, gaming consoles, mobile devices, and even workstations. This poises the
company to be at the forefront of the industry when it comes to creating digital content, editing
digital images, designing industrial products, and more. The present and future applications for
GPU technology seem boundless. NVIDIA sells their products to system builders, add-in-card
manufacturers, original equipment manufacturers (OEMs), and consumer electronics
companies in China, Europe, the United States, Taiwan, and several other regions in the Asia-
Pacific.

Beginning in the fourth quarter in 2013, NVIDIA began reporting under the segments of GPU,
Tegra Processor Technologies, and “All Other” which is mainly comprised of license revenues
from their agreements with the Intel Corporation. The GPU Business is primarily concerned with
high-end graphics for notebook and desktop PCs for their GeForce line. This generated 84% of
their revenue in 2017. The GPU (graphics processing unit) is a small yet powerful piece of
technology that can be integrated into the motherboard or sit directly on top of a video card. To
provide a little more background, the majority of their GeForce GPU’s are sold on a video card,
and their line of video cards have come to be their flagship product line. These are mainly
designed for use in the gaming market, as they require complex graphics processing.

The Tegra product line functions as a segment of the Tegra Processor Business, and
constituted 12% of NVIDIA’s 2017 fiscal revenue. This segment saw the first Tegra 3 phone to
the market in addition to the HTC One X. The All Other category which is constituted mainly of
license revenues from NVIDIA’s agreements with Intel Corporation generated 4% of their fiscal
revenue for 2017.

Reasons To Buy

- A very strong aspect of NVIDIA’s performance lies in their decision to license its
graphics IP, which will undoubtedly lead to increased revenues. While it may become
increasingly difficult to sell its expensive yet powerful processing chips with competitors
like Qualcomm, ARM, and intel entering the market, NVIDIA could shift manufacturing
costs to licensees by licensing the technology. Moreover, this could quicken the rate at
which its IP is adopted in the mobile markets.
- Another avenue for growth lies in the company’s “shield gaming device”. The device,
built on the Android Jelly Bean software, is a gaming device which contains a flip up
touchscreen display, analog joysticks, a directional pad and buttons. P2P
communication is available as an added bonus via Bluetooth or Wi-Fi connection. While
preliminary designs make the device look a bit bulky, such high functionality at such a
fair price point will make it a true standout in the market. Other products such as the
NVIDIA SHIELD Android TV device, GeForce NOW, and the latest SHIELD Tablet only
bolster the company’s relevance in the tech market. These devices hit all relevant
qualifications, such as high definition video streaming features, and plans to include LTE
to be distributed through the AT&T, T Mobile, Verizon, and Sprint networks. Staying
relevant within this segment will be determined by the success of these platforms.
- Moreover, NVIDIA has been securing major market share in the way of gaming service
providers. This serves to strengthen the company’s position not only in workstation-
based gaming services, but also in supercomputing segments. These advanced gaming
cards being produced can also add value to manufacturers of Personal Computers
(PCs). This solid lineup of cutting-edge graphics cards, including the new GeForce GTX
750, GeForce GTX 800M, GeForce GTX 980 and 970 have poised the company to be
considered the leading provider of graphics cards amongst all PC makers. According to
sources within the company, PC gaming is growing at a CAGR rate of 10% worldwide.
We hold the belief that the already strong demand for PC gaming will only increase and
serve to boost financial performance moving forward. NVIDIA has consistently
generated significant revenues from its graphics cards due to their considerably high
functionality.
- The key to INVIDIA’s growth may lie in gaming, but as computing becomes more visual,
software will begin to rely more heavily on a visual user interface. As an example, the
Windows 8 platform places a high demand on GPU resources, leveraging high quality
graphics capabilities to improve the overall user experience. Given the heightened
demand for newer tablets in the market, NVIDIA’s High Performance Computing (HPC)
centers are poised to experience major growth in the long run. Moreover, the company
has recently unveiled its HPC technology, the Tesla P100 GPU Accelerator, which
provides greater efficiency and performance to enterprise clients at 70% lower
operational costs. Also introduced was the Tesla M10 GPU, which streamlines
operations by connecting up to 64 users per board. This aids in lowering the per-user
 cost of organizations and serves as a major selling point for the product. Steady
launches of products within their computing segment is a major plus for NVIDIA, as they
are already seeing an increase in demand for their graphics cards.
- NVIDIA has already launched promising new products with several more in the pipeline.
At the Consumer Electronics Show of 2017, NVIDIA CEO Jen-Hsun Huang made the
major launch announcement of the GeForce NOW and the SHIELD TV. Also introduced
at CES 2015 was the 256-core Tegra X1 processor. This new piece of technology
enables PC and console compatibility, allowing developers to build out apps that not
only run on tablets and smartphones, but also on consoles, televisions, and even cars.
Available in both 32 bit and 64 bit versions, this chip will deliver brilliant graphics with a
faster experience for GPUs. What’s more, NVIDIA launched the long-awaited Jetson
TK1 platform, targeted for use in robotics, automotive, and embedded applications. If
that wasn’t enough, their Tegra chips are beginning to be utilized in Google’s Nexus 7
device as well as Microsoft’s Surface tablets. In fact, Google chose NVIDIA’s Tegra K1
to power the Project Tango development kit, allowing developers to build applications
that feature 3D mapping and have sensing capabilities as well. The Tegra K1 is also
being adopted by Chinese mobile manufacturer Xiaomi for their latest tablet. In short, the
introduction of these revolutionary chips will hinder current dependence on the PC
market. Product launches such as these, and those that are still in the pipeline, will
undoubtedly stimulate growth for the company. NVIDIA’s success with the Tegra
processor will continue as it is being adopted by Acer for the Chromebook 13, and by
Hewlett-Packard for the Chromebook 14. Higher adoption of the Tegra K1 will be a
major boost for business for NVIDIA and provide a competitive edge against the
competition, namely Intel and AMD.
- Another factor stoking NVIDIA’s growth lies in its recent alliance with Baidu. This
partnership will bring AI technology in relation to cloud-computing services, home
assistance spaces, and self-driving vehicles to the market. Their agreement stipulates
that Baidu will use NVIDIA’s Volta GPU’s in their cloud services, allowing for real-time
interpretation of images, video, text, and speech. Baidu also has adopted NVIDIA’s
DRIVE PX 2 AI, a supercomputer, to be used in their Apollo self-driving car efforts.
NVIDIA will hold up their end of the bargain, which is to use the Baidu DuerOS AI
assistant in their Shield TV product. This deal is clearly a win-win for both companies,
and will help both develop newer, stronger products to bring to market. Furthermore, this
partnership will strengthen both parties capabilities in different areas-- most notably in
the autonomous or ‘self-driving’ vehicle market.
- Since the recession in 2013, U.S. automobile market has completely recovered. Making
a play to benefit from this, NVIDIA jumped into the autonomous vehicle and electronics
space in 2015. This was accomplished at the CES when they launched a state-of-the-art
computer vision system. Since then, the company has pushed forward and has
consistently brought more advanced technologies into the space. In early 2016 NVIDIA
introduced the DRIVE PX 2, the world’s strongest engine for in-vehicle AI, to the market.
Later in September of 2016 they unveiled a supercomputer chip called Xavier designed
for self-driving cars at their GPU Technology Conference in Amsterdam. Leading up to
2017, NVIDIA has entered into partnerships with mega players such as Bosch,
 PACCAR, HERE, and ZENRIN to name a few. Assured by this unwavering focus on
developing and producing new AI technologies for the self-driving car market, we
maintain that the company is braced to experience tremendous growth in the space of
driverless technology.
- The focus that NVIDIA has placed on GRID platforms is anticipated to boost GPU
adoption in data centers around the world, which will provide a great advantage against
competitors in the market. The NVIDIA GRID is a capable GPU-based platform which
lends support to virtualized corporate desktops, particularly in data centers. It also
supports cloud gaming services and provides a remarkable visual graphics experience
that companies would otherwise have to draw from a dedicated PC, which can be
expensive and exhaustive. A strategic partnership was fostered between NVIDIA and
VMware to run the GRID technology on the VMware Horizon Desktop-As-A-Service
(DaaS) Platform. This should result in an enriching of NVIDIA’s automation,
virtualization, and could-based portfolios across the board. It’s our opinion that NVIDIA’s
revenues stand to benefit greatly from this, as long as technology meets user
requirements. More recently, the company has unveiled a test drive program under the
GRID technology which is able to support graphics-heavy applications, particularly via
cloud computing. This GRID “Test Drive” allows clients to test Grid-backed VDI, or virtual
desktop infrastructure, with ease and without a pilot. This new program has garnered
significant interest which should lead to an increase in demand for the company’s
graphics technology. In fact, a plan for future growth was put forward by the company in
a recent investor meeting, detailing new products and devices which they are planning to
launch soon. According to the company, strategic moves are being made to expand its
GRID technology for approximately 500 million enterprise clients. Lastly, it was
emphasized by management that the NVIDIA GRID will be available on over 50 different
server platforms. In summation, we strongly believe that the GRID, which will advance
the visual effects of games, will play a major role in future revenue for the company as
well as margin growth.

Risks

- The domestic decline of the PC market has had an effect on several chip producers, and
big names like Intel and AMD have not been immune. Despite this, NVIDIA has been
able to counteract the slowdown by shifting its focus onto other markets such as
driverless vehicles, datacenter tech, and AI. That being said, their dependence on the
PC market will continue, and will therefore be affected by adverse conditions in the
market. Preliminary data provided by Gartner suggests that PC shipments in the third
quarter of 2017 have decreased 3.6% year over year to just 65 million units. What’s
more, this is the 12th straight quarter of year-over-year fall which is the longest downturn
in the PC industry’s history. Furthermore, the research firm suggested that the shortage
of certain key components such as SSD, DRAM, and LCD panels is creating an increase
in PC prices, which in turn impedes demand. Because of this, we suggest slight caution
regarding NVIDIA’s performance in the short-term.
 - Recent competition between AMD and NVIDIA has taken a significant turn. In the past,
NVIDIA and ATI both produced graphics chips to supply the PC market. AMD later
acquired ATI and combined the graphics chip and CPU into one single part. Currently,
AMD is making strides to bolster their position in the segment of commodity graphics
and CPUs, particularly for gaming consoles. These AMD chips have entered the market
in a major way, being implemented into Sony’s PS4 console which was launched last
holiday season. Furthermore, Microsoft’s Xbox One and Nintendo’s Wii U will also be
utilizing the AMD chips. Potential growth for NVIDIA in the apps processor market is
also limited, as Apple Samsung and Qualcomm currently dominate the market. This
pressure from competition, including the two mega CPU vendors Intel and AMD, can
negatively impact revenues for NVIDIA moving forward.
- A large portion of overall sales for the company come from outside of the United States.
In 2017, 2016, and 2015 in particular, approximately 87%, 87% and 83% of company
sales, respectively, came from consumers outside of the U.S. Because of this, we feel
that any unfavorable fluctuations in currency in a somewhat uncertain environment
macro economically may have adverse effects on the company’s growth.
- One other risk for NVIDIA relates to its customer concentration. During the 2017 fiscal
year, approximately 12% of their total revenue came from their single biggest customer,
ASUSTeK. Moreover, its top 2 clients accounted for roughly 29% of their total account
receivables leading up to February of 2017. This high customer concentration level
means that they can lose a customer relatively easily, and the loss of just one would
affect performance in a major way. Because of this, NVIDIA is under a constant pressure
to develop and improve customer relationships.
- NVIDIA’s Price/Book value has been trailing in the past 12 months, sporting (P/B) ration
of exactly 19.88. When compared to what the industry saw over the past year, this level
is unfavorable. While much higher than the 10.83 average level, they find themselves on
the high end of the range when it comes to valuation over this time period. Due to this,
we believe that the valuation looks a bit stretched from the Price/Book standpoint.

Last Earnings Report

NVIDIA is continuing on an earning streak that has spanned 9 straight quarters, and they have
just reported fantastic results for the second-quarter fiscal 2018. Not only did the company mark
a strong improvement year-over-year, but also came out way ahead of our estimates. The
company has beaten its estimates at every turn.

This graphic chip goliath based out of California posted adjusted earnings on a proportionate tax
basis, which included stock-based compensations, of $0.92/share. This surpassed even
conservative estimates of $0.61/share. Moreover, their adjusted earnings jumped from $0.44
reported a year ago.

Additionally, NVIDIA’s earnings have more than doubled year over year to $0.92 from $0.41 per
share on the GAAP basis. The company also reported strong earnings of over $1.01/share on
the non-GAAP basis. This constitutes an increase of nearly 91% from a year ago, when the
figure was only $0.53/share. This robust performance comes primarily from significant revenue
growth over the past year.

Revenues

Company revenues experienced a major boom of 56.2% year-over-year to report $2.230 billion,
surpassing several market estimates and projections. This leap can be primarily attributed to
steady growth across all company platforms, such as the GPUs gaming platform, datacenter,
Tegra automotive platforms, and Professional Visualization. Furthermore, NVIDIA gained a
great amount of strength in the AI space which lent a healthy hand in the quarter’s revenues as
well.

The GPU segment jumped 59% to $1.9 billion in revenue, driven primarily by the GeForce
GPUs Gaming and datacenter revenues.

The Gaming GPU revenues jumped 52% to $1.9 billion year over year, driven by a thriving
gaming ecosystem, and sustained hype and excitement over their recent GPU launches,
naturally growing interest in e-sports, as well as new tech coming into the space.

By maintaining their focus on introducing innovative and agile products into the space, as well
as maintaining partnerships and agreements with leading game developers, the company has
been driving its GPU business steadily. In the last quarter alone, NVDIA brought in the Max-Q
design standard, which will bring quieter, thinner, and faster gaming laptops to market. Joining
forces with gaming goliaths Activision and Bungie, they were also able to bring the game
‘Destiny 2’ to PC for the first time ever.

The company’s prized Volta-based V100 accelerator was by far the most buzzworthy launch of
the quarter, providing 10x the deep learning power to the company’s predecessor, known as
Pascal generation GPUs. In their fiscal 2nd quarter, the company shipped da number of these
production units which are currently supporting the industry’s two most common and respected
AI frameworks-- Facebook’s Caffe and Alphabet’s Google TensorFlow.

Significant growth in GPU sales for the company is also directly attributable to the increase in
demand for cryptocurrencies such as Bitcoin and new technologies such as Etherium. This has
increased demand for GPU and, in turn, spurred this growth.

In addition to this, datacenter revenues registered at $416 million, an increase of 2.5x higher
than last year’s. This was primarily fueled by the strong focus on adopting AI, deep learning,
GRID technologies and high-performance computing or HPC.

The company also entered into a variety of partnerships and agreements based on its AI
technology, most notably including Baidu, Foxconn, Quanta, Wistron, and Inventec. The
overwhelming demand for NVIDIA’s DGX AI supercomputer was sustained as more and more
organizations entering the AI market became focused on developing AI-enabled applications.
The system has been shipped to over 300 clients so far, with over 1,000 more in the pipeline
waiting to be distributed. NVIDIA reports that one of the most notable users of this system is
none other than Facebook.

Solid momentum and progress in its GRID graphics virtualization business led to the company
winning several contracts, including a deal with Amazon’s ‘Amazon Web Services’ division.
Amazon Web Services’ G3 now run on the NVIDIA Tesla GPUs.

Revenues for the Tegra processor came in at $333 million, which constitutes a doubling on a
year over year basis. This increase came on the heels of growth that was much better than
expected in Tegra development services. While automotive business growth remains sluggish,
growth for this segment will inevitably be hampered as a result.

An increase of 18% year-over-year brought automotive revenues in at $142 million for the
quarter, however, this growth rate is much lower than that of the previous quarter which was
around the 25% mark. By continuing to enter into new partnerships with its DRIVE PX AI
platform, the company was able to stimulate growth in this sector.

Focusing on the Professional Visualization field, we can see that the Quadro brought in
revenues of $235 million, constituting a 10% year over year increase which is primarily
attributed to an increase in demand for mobile workstations and real-time rendering tools.

Margins

NVIDIA experienced an expansion of 50 basis points (bps) on their non-GAAP gross margin
from the year-ago quarter to put them at 58.6%, which is directly in line with the guidance range
of 58.6% (+/- 50 bps) set forth by management.

Their non-GAAP profits came in at $1.306 billion which demonstrates an increase of 57.3% from
this quarter last year. This came mainly on the back of the GeForce GPU gaming platform
strength, but was offset by a loss of business due to the break in action of Intel’s licensing
agreement.

The company’s non-GAAP expenses jumped almost 20% to %533 million from the year-ago
quarter. This can be attributed to increased hiring as an attempt to support the company’s
growth initiatives. Non-GAAP operating expenses for the company came right in line with their
projection of roughly $530 million.

NVIDIA’s non-GAAP operating margin took a jump to 34.7% from 26.8% which reflects growth
particularly in its GeForce GTX GPU sector, as well as lower operating costs. To put it in dollars,
the non-GAAP operating income increased from $382 million to $773 million.

Balance Sheet & Cash Flow

NVIDIA closed out the quarter with cash, cash equivalents, and marketable securities of $5.877
billion. Compared with the previous quarter’s $6.206 billion, we can see a total debt for the
company of $1.984 billion. Cash flow from the operations in the first half of the fiscal 2018 came
in at $986 million, with free cash flow coming in at $879 million.

For the first 2 fiscal quarters, NVIDIA paid a cash dividend of roughly $166 million, repurchasing
shares worth $758 million. The company went on to announce a quarterly dividend at
$0.14/share, payable on the 8th of September, 2017.

Guidance

NVIDIA is poised to experience revenues of approx. $2.35 billion (+/- 2%) for third-quarter fiscal
2018.

The non-GAAP gross margin for the company is expected to come in around 58.8% (+/- 50
bps). The company’s non-GAAP operating expenses can be expected to come in at around
$570 million, and capital expenditures are expected to fall in the range of $65-$75 million. The
non-GAAP tax rate is expected to be around 17% (+/- 1%)

For 2018 NVIDIA expects to continue returns of $1.25 billion to its shareholders in share
repurchases and cash dividends.

Recent News

October 10, 2017 - NVIDIA Corp. releases new AI supercomputer chip developed for self-
driving cars, named “Pegasus”, at their GPU Technology Conference in Europe.

August 21, 2017 - NVIDIA announces team-up with Square Enix, bringing Final Fantasy XV
(Windows Edition) to PC.

July 5, 2017 - NVIDIA announces partnership with Baidu. Baidu will use NVIDIA’s AI technology
in 3 contrasting areas. This partnership is expected to assist Baidu in bringing the best AI tech
to its cloud computing services, AI home assistants, and self-driving vehicles.

May 29, 2017 - NVIDIA unveils Max-Q, a new approach to design that will aid companies in
producing thinner, quieter, and faster gaming laptops.